Oil and natural gas dealmaking this year is likely to be led by the deep-pocketed energy majors and large independents, with continuing market challenges potentially leading to more consolidation among Lower 48 players, according to Deloitte.

The total deal count last year declined, but merger and acquisition (M&A) values held up, thanks to some mega-deals in the upstream and downstream, the consultancy said in its 2020 Oil & Gas M&A Outlook. The annual report explored the factors that impacted activity and offered insight on trends to watch for this year.

Absent an increase in commodity prices, the dampened level of dealmaking activity is forecast to continue in 2020. A pivot in the traditional strategy for private equity firms also could accelerate consolidation in the U.S. onshore, with 2020 potentially the year that the “build-to-operate model takes flight” in the Permian Basin and beyond.

“As we enter 2020, the new decade seems to be ushering in a new era of oil and gas portfolio design driven by changing shareholder and investor expectations,” said Deloitte Consulting LP’s Duane Dickson, vice chairman and U.S. oil, gas and chemicals leader.  

“As portfolio optimization, capital discipline and sustainability issues move increasingly to the core of corporate decision making, the drivers and types of deals will likely evolve.”

Total deal value last year increased 40% to $370 billion, but the overall deal count declined from 2018 by 40% as operators struggled with low prices and challenging market conditions.

Upstream deal values totaled $156 billion, up $26 billion year/year. Only 208 deals were struck, 40% below the five-year trend. The United States was the hub for global upstream dealmaking, representing 60%-plus in terms of deal volumes and values.
In the midstream arena, 76 deals were clinched, a 30% hike, together worth $78 billion, up 50% from 2018. Private equity spend increased in this sector as investors pivoted from production to infrastructure.

Oilfield services dealmaking stalled last year, with values reaching $19 billion, off $2.5 billion from 2018 and 35% below the five-year average. Volumes decreased 20% year/year, 10% below the five-year average.

Downstream deal value totaled $114 billion, a decade high and almost double 2018 totals and the five-year average. The number of transactions, however, declined 15%.

"Facing continued headwinds, many private equity firms are being forced to hold their investments for a longer period” for an initial public offering or for corporate sale, but it “is often not a feasible exit strategy, except for the most valuable positions,” said Deloitte & Touche LLP partner Melinda Yee. “These challenges are pushing most portfolio companies to focus on operations to generate returns, until an exit can be made."

The largest driver in 2020 divestitures may be the huge acquisitions made in the past two years, as companies involved in the dealmaking realign their portfolios and sell off assets that don’t fit the strategy.

Occidental Petroleum Corp.’s takeover last year of Anadarko Petroleum Corp. is one example, as it has worked to sell off U.S. midstream properties and international assets to bring more focus to its Permian upstream portfolio.

“In looking at existing assets, some companies are considering carbon footprints when it comes to divestitures,” according to Deloitte’s team. “As investor sentiment has changed, oil companies have increased their discussion of environmental, social and governance (ESG) issues.

“As the size of ESG investment funds grow, so could oil and gas companies' interests in burnishing their environmental credentials. To that end we will likely see not only increased renewables investment but also carbon-based divestitures.”

The oil and gas majors likely will be the primary catalysts for global M&A this year, following last year when some of the biggest producers sold off assets across geographies and resource types.

“The pace may slow down this year, but opportunities remain for further portfolio streamlining with some potentially large asset divestitures across U.S. shale plays, the North Sea and Asia-Pacific in play,” according to the report.

Meanwhile, to capitalize on growing chemicals demand, most international oil and gas companies are looking to build their downstream footprints beyond refining assets and into distribution, retail, and chemicals businesses.

“In 2020, we could see more consolidation of upstream and OFS companies as capital markets refuse to thaw, and topline U.S. production growth continues to decline,” researchers said. “Sellers and management teams, however, might need to be willing to forgo significant premiums to get the deals done in order to achieve the synergies and economies of scale that form the strategic basis for executing the deal, which may make stock more palatable as currency.”